Wednesday, October 15, 2008

katrina in the financial markets

he's got an offer you can't refuse...

in a move straight from the Godfather, hank paulson is now telling bank executives "either your signature, or your bank's brains, will be on that paper."

once again, the New York Times brings the news so effectively:

WASHINGTON — The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left. (link)

the Treasury secretary invites men who probably control half the country's deposits, and serve as fiduciaries for millions of americans. in just 3 1/2 hours, the government gets them to make a huge decision that will affect their companies in unknown ways. boards of directors are barely consulted.

the bush administration has now thrown not only free market capitalism out the window. it has also flushed corporate governance down the drain. talk about imperial CEOs -- signing away their companies rather than endure another minute under the the Treasury secretary's glare.

was dick cheney standing nearby with his hunting rifle and an itchy finger?

this kind of all-or-nothing, with-us-or-against-us posturing is exactly what got us into Iraq.

today someone likened the current collapse to the chaos following katrina. I can think of few better analogies.

paulson went deeper down the rabbit hole by demanding that banks not "hoard" this new capital they're getting, but must "deploy it." while this would obviously help the economy, don't forget these same CEOs are enjoined by law to serve the financial interests of shareholders ... there is no patriotism clause ...

two big problems... first of all, there is a major risk this won't work. even if you strong-arm them into lending, they will not be willing participants, and will not do good jobs. second, it's downright third-world for major government officials to demand that CEOs ignore their sworn fiduciary responsibilities. this is a dangerous flaunting of the rule of law, and again reminds me of my time in Venezuela.

paulson makes things even worse when he apologizes ("we regret having to take these actions.”) now we should ask: why would anyone want to follow a leader who so quickly casts doubts upon his own actions? how can he have any credibility?

at this point, I am terrified. everyone has focused on the need to stabilize the markets in the short term, but something much more worrying has happened: we're trusting GW Bush --the same president who sought tax cuts that snap back after 10 years, invaded iraq on bad information, botched katrina, changed course multiple times on north korea and iran and ignored the credit crisis for over a year, but was willing to fly back to washington from TX to sign a law keeping terri shiavo on life support. (how many 10s of 1000s of dollars did that cost?)

this same illustrious leader will now shape the future of the american financial system with an idea he never liked and doesn't want to impose.... he hates it so much he's making everyone sign it. can anything good come from such a process?

this is katrina in the financial markets... the nine favored banks will get the nicest trailers. what will we get?

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